Cathay General Bancorp - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered a sequential rebound: diluted EPS rose to $1.12 (+19% q/q) on net income of $80.2M, driven by lower deposit costs and a sharp drop in non-interest expense; NIM ticked up to 3.07% from 3.04%.
• Asset quality mixed: non-accrual loans increased to $169.2M and net charge-offs spiked to $16.3M due largely to a syndicated recycling credit; allowance coverage of NPLs fell to 93.39% from 209.33% a year ago.
• Deposits remix favorable: broker deposits declined $449M while core deposits rose $417M; spot rate on deposits ended at 3.52% and ~$4.2B of CDs will reprice near 4.0–4.1% in Q1, supporting further deposit cost relief.
• 2025 outlook: management guides NIM to 3.10–3.20%, loan and deposit growth both 3–4%, core opex +4.5–5.5%, and tax rate 19.5–20.5%; buybacks targeted near $30M in Q1 2025.
• Catalysts: margin stabilization and cost relief, disciplined capital return, and clarity on CD repricing and tax-credit amortization cadence; note rising NPLs and special mention balances as an offset.

What Went Well and What Went Wrong

• What Went Well

  • “We are pleased by the increase in the net interest margin compared to the third quarter of 2024” — NIM expanded to 3.07% and net interest income increased $1.8M q/q.
  • Non-interest expense fell $11.7M (-12%) q/q, mainly from $13.3M lower amortization of low-income housing/alternative energy investments, improving the efficiency ratio to 45.70%.
  • Capital strengthened: Tier 1 risk-based 13.55%, total risk-based 15.09%, Tier 1 leverage 10.97%; buybacks of 506,651 shares for $23.9M and intent to repurchase ~$30M in Q1 2025.

• What Went Wrong

  • Net charge-offs surged to $16.3M (vs. $4.2M in Q3), with ~$12.2M tied to a syndicated commercial recycling borrower.
  • Non-accrual loans rose to $169.2M (+3.9% q/q; +153.7% y/y), including a $16M CRE loan moved to non-accrual after borrower bankruptcy (fully secured, no loss projected).
  • Special mention loans increased to $293M (from $203M in Q3), reflecting caution on a lower-profitability credit; non-interest income fell $4.9M on equity securities mark-to-market.

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's fourth quarter and full year 2024 earnings conference call. My name is Ashia, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. If you would like to participate in this portion of the call, please press star followed by one at any time during the conference. If assistance is needed anytime during the call, please press star followed by zero, and a coordinator will be happy to assist you. Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. Now, I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.

Georgia Lo (Head of Investor Relations)

Thank you, Ashia, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer, and Mr. Heng Chen, our Executive Vice President and Chief Financial Officer. Before we begin, we wish to remind you that the speakers on this call may make forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 concerning future results and events, and that these statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31st, 2023, at item 1A in particular, and other reports in filing with the Securities and Exchange Commission from time to time. As such, we caution you not to place undue reliance on such forward-looking statements.

Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update or review any forward-looking statements to reflect future circumstances, developments, or events, or the occurrence of unanticipated events. This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth quarter and full year 2024 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at www.cathaygeneralbancorp.com. After comments by management today, we will open up this call for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu.

Chang Liu (CEO)

Thank you, Georgia, and good afternoon. Before we go into our 2024 fourth quarter earnings, I know that our hearts are heavy with the news of the devastating fires that have swept across Los Angeles. The destruction is unimaginable, and our thoughts are with every person affected. Recovery is a long-term process. When the flames are extinguished, the work of rebuilding lives and communities will continue. The bank, along with the rest of our Los Angeles community, will continue to work diligently towards that part. This afternoon, we reported net income of $80.2 million for Q4 2024, an 18.8% increase as compared to $67.5 million in Q3. Diluted earnings per share increased 19.1% to $1.12 per share for the fourth quarter as compared to $0.94 per share in Q3.

During Q4 2024, we repurchased 506,651 shares of our common stock at an average cost of $47.10 per share for $23.9 million under our May 2024 $125 million stock buyback program. We anticipate continuing to repurchase around $30 million in stock in Q1 2025, depending on market conditions. In Q4 2024, total gross loans increased $2.4 million, or 0.05% annualized, primarily driven by increases of $59 million, or 2.4% annualized, in CRE loans, and $13 million, or 11.9% annualized, in construction loans, offset by decreases of $61 million, or 4.2% annualized, in residential mortgages, and $9 million, or 1.1% annualized, in commercial loans. We expect loan growth in 2025 to be between 3% and 4%. Slide 7 shows the percentage of loans in each major loan portfolio that are either fixed-rate or hybrid loans in their fixed-rate period.

Our loan portfolio consists of 63% fixed-rate and hybrid loans, excluding fixed-to-floating interest rate swaps on 4.1% of the total loans. Fixed-rate loans comprise 31% of total loans, and hybrid and fixed-rate loans comprise 32% of total loans. We expect these fixed-rate loans to support our loan yield as market rates are expected to decline. We continue to monitor our commercial real estate loans. Turning to slide 9 of our earnings deck, as of December 31st, 2024, the average loan-to-value of our CRE loans was 49%. As of December 31st, 2024, our retail property loan portfolio, as shown on slide 10, comprised 24% of our total CRE loan portfolio or 13% of our total loan portfolio. 90% of the $2.4 billion in retail property loans is secured by retail stores and buildings, neighborhood mixed-use or strip centers, and only 9% is secured by shopping centers.

On slide 11, office property loans represent 14% of our total CRE loan portfolio or 7% of our total loan portfolio. Only 36% of the $1.4 billion in office property loans are collateralized by pure office, and only 3.5% are in central business districts. 36% of office property loans are collateralized by office retail stores, office mixed-use, and medical offices, and the remainder 28% are collateralized by office condos. For Q4 2024, we reported net charge-offs of $16.3 million, as compared to $4.2 million in Q3. Of the $16.3 million net charge-offs, $12.2 million is related to a syndicated commercial loan for a borrower in the recycling business. Our non-accrual loans were 0.83% of total loans as of December 31st, 2024, which increased $6.3 million to $169.2 million as compared to Q3.

The increase in non-accrual loans during Q4 2024 came primarily from a $16 million CRE loan collateralized by a commercial and residential mixed-use property in New York. The loan was reclassified as non-accrual in December after the borrower filed for bankruptcy. The loan is fully secured by the collateral, and no loss is projected. Turning to slide 13, as of December 31st, 2024, classified loans decreased slightly to $380 million from $382 million in Q3, and our special-mention loans increased to $293 million from $203 million in Q3. We recorded a provision for credit loss of $14.5 million in Q4 2024, same as for Q3. The reserve-to-loan ratio decreased to 0.83% for Q4 from 0.85% for Q3. However, excluding our residential mortgage portfolio, the total reserve-to-loan ratio would be 1.08%.

Total deposits decreased by $258 million, or 5.3% annualized, during Q4 2024, primarily due to the decrease of $449 million in brokered deposits. Total core deposits increased $417 million, or 16.7% annualized, due to seasonal factors and marketing activities. Total time deposits, excluding brokered deposits, decreased $226 million during Q4 2024. We expect deposit growth for 2025 to be between 3% and 4%. As of December 31st, 2024, total uninsured deposits were $8.6 billion, net of $0.8 billion in collateralized deposits, or 43.8% of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $7.2 billion and the Federal Reserve Bank of $395 million, and unpledged securities of $1.5 billion as of December 31st, 2024. The sources of available liquidity more than cover 100% of uninsured and uncollateralized deposits as of December 31st, 2024.

I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the quarterly financial results in more detail.

Heng Chen (EVP and CFO)

Thank you, Chang. Good afternoon, everyone. For Q4 2024, net income increased to $12.2 million, or 18.8% to $80.2 million compared to $67.5 million for Q3, primarily due to an increase of $1.9 million in net interest income, $11.6 million decrease in non-interest expense, and $4.1 million decrease in income tax expense, offset by a $4.9 million decrease in non-interest income. Q4 2024 net interest margin was 3.07% as compared to 3.04% for Q3. We are pleased that our net interest income appeared to have bottomed out, and we anticipate further benefit to the net interest income based on the ability to lower deposit costs over the next few quarters while having the support of our fixed-rate loans. With the strong December job report, the Fed Fund Futures projects one rate cut in July 2025.

We anticipate that the net interest margin for 2025 to range between 3.10% and 3.20% in Q4. Interest recoveries and prepayment penalties added four basis points to the net interest income to the net interest margin as compared to five basis points in net interest margin for Q3. Non-interest income for Q4 2024 decreased $4.9 million to $15.5 million when compared to $20.4 million in Q3 2024. That decrease was primarily due to a $5.6 million change in mark-to-market unrealized gain of 4.3% in Q3 to unrealized loss of $1.3 million in Q4 on equity securities. Non-interest expenses decreased by $11.6 million, or 12%, to $85.2 million in Q4 2024 when compared to $96.9 million in Q3. This decrease was primarily due to $12.7 million in lower solar tax credit fund amortization.

We expect core non-interest expense, excluding tax credit and core deposit intangible amortization, to increase between 4.5%-5.5% from 2024-2025. The effective tax rate for Q4 2024 was 7.6% as compared to 13.6% for Q3. We expect an effective tax rate between 19.5% and 20.5% for 2025. We do not anticipate investing in any solar tax credit investment funds in 2025. As of December 31, 2024, our Tier 1 leverage capital ratio increased to 10.97% as compared to 10.2% as of September 30, 2024. Our Tier 1 risk-based capital ratio increased to 13.55% from 13.33% as of September 30, 2024, and our total risk-based capital ratio increased to 15.09% from 14.88% as of September 30, 2024.

Chang Liu (CEO)

Thank you, Heng. We will now proceed to the question and answer portion of the call.

Operator (participant)

Ladies and gentlemen, if you have a question at this time, please press star then one key on your touch-tone phone. We ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. If your question has been answered or you wish to remove yourself from the queue, please press star then two. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. Your first question comes from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark (Managing Director and Senior Research Analyst)

Hey, good afternoon. Just a few questions around the margin. Could you give us the average margin in the month of December and the spot rate on deposits at the end of the year?

Heng Chen (EVP and CFO)

Yeah. The average margin for the month of December was 3.05%. I'm sorry, 3.11%. That included six basis points of interest recoveries. And then what was the other part of your question?

Matthew Clark (Managing Director and Senior Research Analyst)

The spot rate on deposits, either total or interest-bearing, at year-end.

Heng Chen (EVP and CFO)

The total spot rate at year-end was 3.52.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. That's interest-bearing. Okay. And then can you remind us how much in the way of CDs you have coming due here in the first quarter and the rates they're maturing at, and what do you expect them to renew at?

Heng Chen (EVP and CFO)

Yeah. It's quite a bit. So we have $4.2 billion of CDs maturing. This is from our Chinese Lunar New Year promotion that's maturing, and the average yield is 4.6%. We're offering the renewal from the Chinese New Year CD at between 4% and 4.1%, depending on the size of the deposit.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. And then just last one, and I'll hop back in the queue. Your expectations for the low-income housing tax credit amortization this year in dollars?

Heng Chen (EVP and CFO)

It's about $10 million a quarter, Matthew.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay, and I know you're not going to do any solar, but are there any other tax credit investments embedded in that tax rate guidance, or is it just the low-income housing we're assuming for now?

Heng Chen (EVP and CFO)

It's just low-income housing.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. Thank you.

Operator (participant)

The next question comes from Chris McGratty with KBW. Please go ahead.

Christopher McGratty (Managing Director and Head of U.S. Bank Research)

Oh, great. Thanks for the question. I was wondering if you could unpack the core expense growth of roughly 5%, a little bit higher than what we've been seeing. I'm wondering if there's a catch-up in some investments or anything in particular you'd call out.

Heng Chen (EVP and CFO)

It's mostly we've been adding to staff in 2024, so it's the full-year impact of that. And then we expect higher bonus accruals for next year because this year we're paying out bonuses that are lower than the target. So that's that. But really, Chang, there's nothing significant.

Chang Liu (CEO)

Yeah. So, Chris, since spring of 2023, we had to really beef up our risk side of our business given the higher level of maturity on the risk side that's expected from the regulatory side. So that's where we've been adding some of the bodies. I looked at, actually, our headcount. It's been pretty consistent on the branch side and the lending side, other than the uptick in the operational side.

Christopher McGratty (Managing Director and Head of U.S. Bank Research)

Okay. Great. Yeah, you've talked about that, Chang, in the past, of beefing up the regulatory side. Okay. That makes sense. And then on the $90 million increase in, I guess, a special mention, any color there that you could provide?

Heng Chen (EVP and CFO)

Most of it is one credit that just had some lower profitability. So as a caution, we put that loan on special mention.

Christopher McGratty (Managing Director and Head of U.S. Bank Research)

Great. Thank you very much.

Heng Chen (EVP and CFO)

Yes. Thank you.

Operator (participant)

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner (Managing Director and Senior Research Analyst)

Thanks. Good afternoon. I wanted to ask about the impact of the wildfires. Obviously, nothing in terms of a kind of credit ramification for you this quarter. I know a lot of those areas had been closed to access for a period of time. They may still be. Can you talk about how you've gone about sort of assessing kind of the either property-specific exposure you might have or kind of exposure to underlying businesses that might operate in some of these areas?

Chang Liu (CEO)

Sure, Gary. So let me kind of give you some update. We look at the affected areas by ZIP codes. We also looked at what additional data is available based on LA County inspections. So far, we have no loss reported of any of our commercial real estate portfolio, nothing in the business banking portfolio, and nothing in the SBA portfolio. We have some reported items in the C&I portfolio. There's one C&I portfolio with a collateral in the Palisades in that segment of it. And we have a few of the mortgages and two HELOCs that we've received reports as well as have verified them through some of the websites. But it's a small number compared to the size of the mortgage assets that we have in total.

Gary Tenner (Managing Director and Senior Research Analyst)

Okay. I appreciate the color there, and then just in terms of the securities yield, it's come down a few quarters in a row. I didn't recall there being much in the way of variable-rate securities in your portfolio. Could you kind of talk to expectations of the securities yield going forward?

Heng Chen (EVP and CFO)

Yeah. Gary, it's most of the change. Well, we've been buying six-month Treasuries, and so that rate has come down in 2024, and then we have some financial institution debt that's been called or matured. Those were generally in the over 5% range, and those were not replaced, but that's pretty much it. We're not looking to expand the total amount of our securities portfolio at this time.

Gary Tenner (Managing Director and Senior Research Analyst)

All right. Thank you.

Heng Chen (EVP and CFO)

Yep.

Operator (participant)

Once again, if you have a question, please press star then one. The next question is with Stephens. Please go ahead.

Andrew Terrell (Managing Director and Research Analyst)

Hey, good afternoon. Chang, just a question on capital. I think I heard in your prepared remarks continued maybe interest in the buyback, but your capital is still in a really strong position. Just wanted to get updated thoughts from you on any other potential avenues of capital deployment. Is M&A of interest to you in 2025? Would love to hear your thoughts.

Chang Liu (CEO)

Yeah. Sure, Andrew. We've always had an eye on the M&A side of the business, but as you know, we operate in a very niche market. There's certainly a number of players in our market. There's certainly some in Texas and New York, but the Texas and New York always sort of sub a billion, which doesn't really move the base that much. The ones in our backyard, it depends on the opportunity. If the opportunity is there, then certainly we'll look at it. If it makes sense for us and it's accretive to the numbers, and if it's a strategic mix for us that makes sense, that's definitely something we'll look at. But some of them have profiles that's very similar to ours, and there's not a lot of sort of enterprise value there. So it certainly gives us a pause, even if they were to become available.

Andrew Terrell (Managing Director and Research Analyst)

Understood. Thank you. And then on the margin, I guess specifically the broker deposit runoff this quarter, was that pretty evenly spread throughout the fourth quarter? Was it front-end or back-end loaded? And then just expectations going forward, is there any more brokered deposits that you foresee remixing throughout 2025?

Heng Chen (EVP and CFO)

Yeah. Andrew, most of it was in November and December where we had an inflow of core deposits, some of which left in the second half of December, the core deposits. But we'll probably just maintain the brokered CD portfolio. It's come down quite a bit, and we'll just maintain it unless we have good deposit growth that's higher than our loan growth. But it's an incremental source of deposits for us.

Andrew Terrell (Managing Director and Research Analyst)

Got it. Okay. Thank you for taking the questions.

Heng Chen (EVP and CFO)

Yeah. Thank you.

Operator (participant)

The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark (Managing Director and Senior Research Analyst)

Hey, I think you called out as part of your net charge-offs being Shared National Credits related. Can you just remind us how large your SNC portfolio is?

Heng Chen (EVP and CFO)

It's about 4% of our total loans. We've been shrinking that in 2024 to reduce risk exposures.

Matthew Clark (Managing Director and Senior Research Analyst)

Got it. And I guess what % of that portfolio is criticized?

Heng Chen (EVP and CFO)

I think most of the classified is in our non-accrual. So it's lower than average because we did sell about $50 million of Shared National Credits in Q4 to reduce credit exposures, and we sold those at a small discount, 2% or 3%.

Matthew Clark (Managing Director and Senior Research Analyst)

Got it. Okay. And then just on the Chief Risk Officer departure, I think late last week looked like a retirement, but can you just provide some more color there on the?

Chang Liu (CEO)

Sure. Yeah. I mean, it's really kind of just timing, right? I mean, it's really the incumbent CRO has expressed that he wanted to step down and retire and kind of move off to the next chapter. But in the meantime, we were able to go out into the market and search for candidates that are qualified in that space. And really, I think post-spring of 2023, we need to be more focused on the risk side of the business. And so we believe we found the right candidate in Diana, and we're counting on her and going forward to elevate the maturity level of the risk side for us.

Matthew Clark (Managing Director and Senior Research Analyst)

Great. Thank you.

Operator (participant)

Thank you for your participation. I will now turn the call back over to Cathay General Bancorp Management for closing remarks. Please go ahead.

Chang Liu (CEO)

I want to thank everyone for joining us on our call, and we look forward to speaking with you at our next quarterly earnings release call.